Textile Machinery Corporation Limited, Calcutta v. the Commissioner of Income-tax, West Bengal, Calcutta

. GoswAMI, J. These two appeals by certificate are from the· Judgment of the Calcutta High Court since reported in Commi.1sioner of Income-tax, West Bengal-I v. Textile Machinery Corporation('). The two appeals relate respectively to two assessment years 1958-59 (calendar year 1957) and 1959-60 (calendar year 1958). The matter rela~es to the claim by the assessee for exemption of tax under section 15C of the Indian Income-tax Act, 1922 (briefly the Act). The matter came up before the High Court on a reference under section 66 (1) of the Act. The two questions referred to were as follows:- "(l) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Steel Foundry Division was an industrial undertaking to whkh section 15C of the Indian Income-tax Act, 1922, applied? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Jute Mill Division set up by the assessee-company was an indus­ trial 1,mdertaking to which section 15C of the Indian Income­ tax Act, 1922, applied? The facts may briefly be stated : The assessee (the appellant herein) is a heavy engineering concern manufacturing boilers, machinery parts, wagons, etc. For the assess- B ment years 1958-59 and 1959-60 the assessee cl11imed exemption of tax under section 15C of the Act in respect of the profits and gains derived from its Steel Foundry Division and a similar claim for relief under section l 5C in respect of i's profits and gains derived from its Jute Mill Division for the year 1959-60. The assessee had previously in the earlier years bought from out­ side the castings manufactured in the Steel Foundry Division which was started in the assessment year 1958-59 and continued thereafter. Again, similarly in the year 1959-60. in addition to the manufactur- ' ing of castings in the Steel Foundry Division the assessee started the Jute Mill Division where the parts made out of the raw material sup­ plied by the Boiler Division by machining and forging them were given to the Boiler Division of the assessee. It was found that out of a total sale of Rs. 28,23.127 /- of steel castings good~ worth Rs. 18,39,433/- were used in connection with the various Divisions of the company. In respect of the Jute Mill Division. the Incomc­ tax Officer found that out of the total ~ale~ of Rs. 13,03,509/- sales to the Boiler Division totalled Rs. 11,89,812/- and sale~ to outside the Jute Mill Division totalled only a sum of Rs. 1,13.697/-. The Income-tax Officer and the Anpellate Assistant Commissioner, on the above facts, held the under'.akings as expansion and reconstruction of the business already existing and hence the assessee was not entitled (1) 80 I.T.R. 428. TEXTILE MACH. CORP. v. COMM. OF I.T. (Goswami, J.) 765 to exemption under section l SC of the Act. ·The Income~tax Appel­ late Tribunal, however, allowed the appeal of the assessee and accept­ ed the claim for exemption under section 1 SC. According to the Tribunal both the Steel Foundry and the Jute Mill Division of the assessee were new industrial undertakings. The above conclusion was reached on the basis of several facts found by the Tribunal. These are that the machinery was new, was housed in a separate building and that industrial licences had to be obtained, for manufacturing the parts in question. According to the Tribunal the existing business of the assessee consisted of manufacturing boilers, wagons, etc. and for that purpose the assessee was purchasing the spare parts, forgings and castings from outside. The Tribunal came to the conclusion that the business of the new industrial undertakings was to manufacture those very spare parts: Hence the Tribunal concluded that it could not be said that the undertakings were formed out of the existing business to come within the mischief of the exclusion clause in section 15C(2) (i). The Tribunal rightly relying upon the Tata Iron and Steel Co. Ltd. and Others v. State of Bihar(') also held that even though the manu­ factured products of the new industrial undertakings were mostly used in the assessee's other business of manufacturing boilers, wagons, etc. the element of profit was there and the extent of the same could be ascertained as the assessee was maintaining separate books of account. In the reference at the instance of the Department the High Court answered both the questions in the negative and against the assessee. The High Court held as follows:- "The goods which the steel foundry division and the jute mill division began producing for the assessee were also previously used by the assessee in its business, .but they were purchased from outside and this purchase from outside was :replaced by production or manufacture from within the assessee's own business. This change of producing one's own goods systematically used in the existing business instead of buying them from outside would only be a recons­ truction of a business already in existence. . . . . . In so far as they started producing and manufacturing themselves, the assessee was doing something which was only a reconstruc- tion of the business already in existence. . . . . . . . · The newness of the machinery of the steel foundry divi­ sion and the- jute mjll 1livision could not by itself make _them new industrial undertakings. Separate housing of, and separate accounts for, the steel foundry division and jute mill division may be only parts of reconstruction of the same business and did not necessarily indicate a new indus­ trial undertaking. The grant of a special licence for the steel foundry division did not make it an industrial under­ taking to qualify for exemption from tax under section 1 SC, because the licence was for expansion of the existing indus­ trial undertaking and the licence did not cover the jute mill division". (1) 48 I.T.R. 123. .B ·C 766 SUPRi:MI COUAT lllPORTS [1977] 2 s.c.R. It is, however, admitted before us that both the units were covered by licence8. · ... ' ' The controversy in these appeals centres round the true con~truc­ tion of section 15C(2) (i) of the Act and in particular with regard to the scope and ambit of the expression therein, namely, the reconstruc­ tion of business already in existence. Is the High Court right in holding that the two industrial undertakings, namely, the Steel Foun­ dry and the Jute Mill Division, are formed by reconstruction of the business already in existence differing from the contrary conclusion reached by the Tribunal ? Before we proceed further, we will read section 15C as it stood during the material time : •.. ~-··· "15C. Exemption from tax of newly established indus­ trial undertakings. ( 1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any indsutrial under­ taking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. (2) This section applies to any industrial which- undertaking (i) is not formed by the splitting up, or the re­ construction of, business already in existence or by the transfer to a new business of building, machinery or plant, previously used in any other business; (ii) has begun or begin~ to manufacture or producs article~ in any part of taxable territories at any time within a period of thirteen years from tht 1st day of April 1948, or ~uch further period a~ the Central Government may, by notificatioa in the Oflicial Gazetto, ~ity with reference ~ any particular indu~trial undertaking; (iii) employs ten or more worker~ in a manu­ facturing proce~~ carried on with the aid of power, or employ~ twenty or more workers ill a manufacturin1 proeces carried on without the aid of power; ..... J I . Provided that the Central Government may, by !!.oti~ea~ tion in the Official Gazette, direct that the exemption coll­ ferred by thi~ section shall not apply to any particular iDdus­ trial lilndortaking. ·-.. / 0 TEXTIL~ MACH. OOR;. v. COMM .. OF~-~·· (Goswami,/.) 767 (3) (4) The profits or· gains of an industrial undertaki~g .to which this section applies shall be computed . in accordance with the provisions of section 10. The tax shall not be payable by a shareholder in res­ pect of so much of any dividend paid or. deemed to be paid to ·him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this section. (5) Nothing in this section shall affect the application of section 23A iri relation to the profits or gains of an industrial undertaking to which this section_ applies. (6) The provisions of this section shall apply to the assessment for the financial year next following the previous year in which the assessee begins to manu­ facture or produce articles and for the four as~ess- ments immediately succeeding''.. · We are principally concerned in these appeals with clause (i) of sub-section (2) of section 1 SC and that also only with one part of it, namely, whether the industrial undertakings, Steel Foundry and the Jute Mill Division, are not formed by the reconstruction of the busi­ ness already in existence. The learned Additional Solicitor General submits that these ·two undertakings are not entitled to exemption under section 15C(2) as rightly so held by the High Court since they were formed by the reconstruction of the assessee's business already in existence, namely, the business of heavy engineering. He submits that setting up of a separate unit to do something in the course of pre-existing manufac­ turing process to aid the production of the same article as was being produced by the pre-existing industrial undertaking would not amount to starting of a new industrial undertaking. He further emphasises i that production of the articles in the S:eel Foundry and in the Jute '------ · Mill Division is only ancillary activity to the main business of the assessee and since the articles produced in these two supplemental undertakings help in producing the identical article which has been the end-product of the assessee's main business, section 15C(2) (i) cannot come to the aid of the assessee. According to Mr. Raman these two industrial undertakings cannot be said to be not formed out of the reconstruction of the business already in existence. Section 15C(2) (i) only excludes three categories of indu~trial undertakings from the benefit of the section without referring to clauses (ii) and (iii) of that sub-section and other limiting provisions of the section which are not applicable in the instant case. It is contended by Mr. Palkhivala that acceptance of the Additional Solicitor General's submission will amount to adding a fourth category of cases in sub-section (2) (i), namely, an industrial under- B· E . 768 SUPREME COURT REPORTS (1977] 2 S.C.ll. taking which is an ancillary undertaking manufacturing certain articles to supplement the principal industrial activity. This, says Mr. Palkhivala, will be adding something to the section. Section 15C is an exemption section. The benefit granted under this section is a partial benefit so far as the quantum of the exempted profi,s of the new industrial undertaking as also for a limited period or periods as specified in the section. If the two industrial under­ takings, about the existence of which there can be no controversy as found by the Tribunal, cannot be held to be formed by the reconst~uc- tion of the business already in existence, the benefit of section 15C will be available to the assessee. The principal object of section 15C is to encourage setting up of new industrial undertakings by offering tax incentive within a period of 13 years from April 1, 1948. Section 15C provides for a frac­ tional. exemption from tax of profits of a newly established undertaking for five assessment years as specified therein. This section was insert- ed in the Act in 1949 by section 13 of the Taxation Laws (Extensio11 to Merged States and Am~ndment) Act, 1949 (Act 67 of 1949) extending the benefit to the actual manufacture or production of arti- cles commencing from a prior date, namely, April 1, 1948. After the country had gained independence in 1947 it was most essential to give fillip to trade and industry from all quarters. That seems to be the background for insertion of section 15C. It is also significant that the limit of the number of years for the purpose of claiming exemption has been progressively raised from the initial 3 years in 1949 to 6 years in 1953, 7 years in 1954, 13 years in 1956 and 18 years in 1960. The incentive introduced in 1949 has been thus stepped up ever since and the only object is that which we have already mentioned. Under sub-section (1) of section 15C the tax shall not be paya­ ble by an assessee on profits not exceeding six per cent per annum on the capital employed in the new industrial undertaking from the profits of which alone exemption is claimed. Sub-section (2) of section _ __) 15C has a negative as well as a positive aspect. Negatively, the new · industrial undertaking of the assessee should not be formed- ( 1) by the splitting up of the business already in exis­ tence, (2) by the reconstruction of business already in exis­ tence, or (3) by the transfer to a new business of building, machi­ nery or plant used in a business which was being carried on before April 1, 1948. We agree that it is not possible to exclude any new industrial under­ taking other than the three categories mentioned above. TEXTILE MACH. CORP. y. COMM. OF ,I.T. ,(Goswami, J.) 769 We are concerned in these appeals with the type No. (2) · men­ tioned· above. · Positively, the new industrial undertaking must pro­ .duce result, that is to say, it has to manufacture or produce articles .at any time within a period of 13 years from April 1, 1948. The fur­ ther requirement under sub-section (2) is with regard to the per­ .sonnel in the undertaking, namely, that ten or .more workers have to work in the manufacturing process carired on wich the aid of power or twenty or more workers have to carry on work without the aid of ,power. The above element with regard to the number of workers engaged in the undertaking would go to show that even small indus- trial undertakings, newly started, are within the exemption clause, where, for example, twenty workers may complete the industrial pro­ ·cess without the aid of power. There is no controversy about the positive aspects in these appeals. Again, the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by piercing the veil of the new business it is found that there is employment of the '.assets of the old business, the benefit will be not available. From this it clearly follows that substantial investment of new capital is impera­ tive. The words "the capital employed" in the principal clause of section rsc are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new under­ ·taking where substantial investment of fresh capital must be made in ·order to enable earning of profits attributable to that new capital. The assessee continues to be the same for the purpose of assess­ ment. It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those -which it has been manufacturing or producing in its existing business. Manufacture of production of articles yielding additional profit attri­ butable to the new outlay of capital in a separate·and distinct unit is the heart of the matter, to earn benefit from the exemption of tax ; liability under section 15C. Sub-section (6) of the section also points to the same effect, namely, production of articles. The answer, in i ·every particular case depends upon the peculiar faets and conditions '- . ·of the new industrial undertaking on account of which the assessee ; , +. ' claims exemption under section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological ·developments. There is great scope for expansion of trade and indus­ try. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, ·would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial under­ taking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business.. No particular decision in one case can iay down an inexorable test to deterffiine whether a given case comes under section 15C or not .. In order that the new undertaking ;can be said to be not formed out of the already existing business, there 770 SUPREM~ ·toURT 1rn·PO!tTS [1977]' 2•s.C.R. must be a new emergence of a physically separate industrial unit i>hich may exist on its own as a viable unit. An undertakings is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two under;. takings which are separate and distinct. It is clear that the principal business of the assessee is heavy engineering in the course of which it manufactures boilers, wagons, etc. If an industrial undertaking produce certain machines or parts which are, by themselves, identifiable m:::s being marketable commo- dities and the undertaking can exist even after the cessation of the principal business of the assessee, it cannot be anything but a new and separate industrial un.dertaking to qualify for appropriate exemp­ tion under section 1 SC. The principal business of the assessee can be carried on even if the said two additional undertakings cease to function. Again, the converse is also true. The fact that the articles produced by the two undertakings are used by the Boiler Division of the assessee will not weigh against holding that these are new · and separate undertakings. On the other hand the fact that a portion of the articles produced in these two new industrial undertakings had been sold in the open market to others is a circumstance in favour of the assessee that the new industrial units can function on their own. Use of the articles by the assessee is not decisive to deny the benefit of section 1 SC. .• Section 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that .section l SC is app_licable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing . substantial funds. The new activity may produce the same commodities of the old business or it may produce some ether distinct marketable products, even commodi- ties which may feed the old business. These products may be con- ..i.. ,,, sumed by the assessee in his old business or may be sold in the open ,. market. One thing is certain that the new undertaking must be an _) integrated unit by itself wherein articles are produced and at least a ; minimum of ten persons with the aid of power and a minimum of twenty persons without the aid -of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer ·of any assets of the old business to the new undertaking which takes place when there is reconstruction of the .old business. For the purpose of section 1 SC the industrial units set up must be new in the ~ense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of section 1 SC the new undertaking must be formed by recons- truc'ion of the old business. Now in the instant case there is no for- mation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are tnms- ferred substantially to the new undertaking. There is no such trans- fer of assets in the two cases with which we are concerned. TEXTILE MACH. CORP. v. COMM. OF I.T. (Goswumi, J.) 771 We will now deal with the question whether the two undertakings A of the assessee are formed by reconstruction of the existing business. The word 'reconstruction' is not defined in the Act but has received judicial interpretation. In re South African Supply and Cold Storage Company, Wild v. Sarne Company('), Buckley, J. dealing with the meaning of the word 'reconstruction' in a company matter observed as follows:- .• "What does 'reconstruction' mean? To my mind it means this. An undertaking of some deffnite kind is being carried on, and the conclusion is arrived at that it is not clesirnble to kill that undertaking, but that it is desirable to preserve. it in some form, and to do so, not by selling it to an outsider who shall carry it on-that would be a mere sale-but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially the same business shall be carried on and substantially the same persons shall carry it on. But it docs not involve that all the assets shall pass to the new company or resuscitated company, or that all the shareholders of the · old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the. same". This concept of reconstruction was accepted by the Bombay High Court in the Commissioner of Income-tax, Bombay City-I v. Gaekwar. Foam aiul Rubber Co. Ltd.('), dealing with section l SC of the Act. While adverting to the passage which we have just quoted the Bombay High Court observed as follows in the above decision : "Now fully appreciating the distinction which counsel for the Revenue has sought to make between the case of a reconstruction of a company and the case of reconstruction of a business, these observations, as we read them, a're equally illuminating in the context of reconstruction of business already in existence in the case of a newly established indus­ trial undertaking" . . The Delhi Higµ Court also in Commissioner of Income-tax v. Ganga Sugar Corporation Ltd. (3 ), accepted the above concept of 'reconstruction' in the following passage:- · "We have given the matter our earnest consideration and are of the view that in the reconstruction of business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however Dartial or restricted it may be, of ownership of the assets. - The trans­ fer, however, need not. be of all the assets, It is none the less imperative that there should be continuity and preser­ vation of the old undertaking though in an altered form, -o)r19041 2 ch, 26s. (2) 35 T.T.R. 662. (3) 92 T.T.R. 173. \. 772 SUPREME COURT REPORTS [1977) 2 S.C.R. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not los~ its separate and independent identity even though it has been set up by a company which is already running an industrial unit before the setting up of the new unit". We endorse the above views with regard to reconstruction of business. Reconstruction of business involves the idea of substantially the same persons carrying on substantially the saine business. It is stated on behalf of the Revenue that the same company in the instant case ..JI continues to do the same business of heavy engineering-·no matter '1111111111 C certain spare parts neccssaty as components to completion of the cnd­ product are now manufactured in the business itself. The fact that the assessee is carrying on the general business of heavy engineering will not prevent him from s·etting up new industrial undertakings and from claiming benefit under section 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under section 15C, the following facts have to be established by the assesscc, D subject always to the time-schedule in the section :- ( 1) investment of substantial fresh capital in the indus- trial undertaking set up, - ( 2) employment of requisite labour therein, (3) manufacture or production of articles in the said undertaking, ( 4) earning of profits clearly attributable to the said new undertaking, and ( 5) above all, a separate and distinct identity of the industrial unit set up. We may add that there is no bar to an assessee carrying on a parti- cular business to set up a new industrial undertaking on account of ·...,.., which exemption of tax under section 15C may be claimed. The legislature has advisedly refrained from inserting a definition of the word 'reconstruction' in the Act. Indeed, in the infinite variety of instances of restructuring of industry in the course of strides in technology and of other developments, the question has to be left for decision on the peculiar facts of each case. If any undertaking is not formed by reconstruction of the old busi­ ness that ungertaking will not be denied the benefit of section 15C simply because it goes to expand the general business of the assessee on some directions. As in the instant case, once the new industrial undertakings are separate and independent production units in the sense that the commodities produced or the results achieved are com­ mercially tangible products and the undertakings can be carried on t. "' I ·- TEXTILE MACH. CORP. 'v. COMM. OF I.T. (Goswami, J.) 773 :separately without complete absorption and l?sing their identity in the old business, they are not to be treated as bemg formed by reconstruc­ tion of the old business. The business of the assessee is of heavy engineering. The two ;new undertakings are independently producing articles which ruay be of aid to the principal business but yet the undertakings are distinct and not reconstruction out of the existing business of the assessee. -Use by the assessee of the articles produced in its existing business or the concept of expansion are not decisive tests in construing section lSC. The High Court is--not right in holding the two undertakings .as formed by reconstructiori of the existing business of the assessee. Several decisions have been cited at the bar before us. We -approve of the conclusions in Commissioner of Income-tax v. Ganga .Sugar Corporation Ltd. ·(supra); Rajeswari Mills Ltd. v. Commis­ sioner of income-tax, Madras('); Nagardas Bechardas & Brothers P Ltd. v. Commissioner of Income-tax Gujarat (2); Commissioner of Income-tax, West Bengal-I v. Electric Construction and Equipment ·Company Ltd. (3); Commissioner of Income-tax v. Hindusthan Motors Limited ( 4). The decision in Commissioner of Income-tax v. Naya Sahitya(') does not represent the correct legal position and, ·hence, cannot be approved. We may observe that we are not required to consider in these .appeals how profit will be actually _ calculated in order to determine the quant\Uil of exemption of six per cent of the profit on the capital ~mployed. If difficulties are insurmountable and; ·therefore, profit -cannot be ascertained, that wiH -be a different question in the course -of -practical application of the section. That kind of a possible diffi- culty should not weigh in the true construction of section lSC. In ihe present case the assessee claimed profit and there Was no difficulty -about ascertainment of the exempted profit as separate books of accounts were kept and the undertakings were at separate places. In view of the foregoing discussion, we are clearly of opinion that the ~igh Court i~ not right in answering the two questions in the -negative and agamst the assessee_. On the other hand the Tribunal was right in answering the two questions in the affirmative and against ·the Department. The two questions referred stand answred in the -affirmative. The judgment of-the High Court, is, therefore set aside and the appeals are ·allowed-with costs. - . . , ' • - . - A· :P.B.R. Appeals allowed. G (1) 50 lT.R. 29. (2) 104 lT.R. 255. · ·(3) 104 :1'r:R. ·101. (4) (1976] Taxation Law Reports. 821. (5) 84 I.T.R. :67. H·